AM Best: 2017/18 cat losses cause downgrades to outpace upgrades in H1 2019

Rating downgrades during the first half of 2019 outpaced rating upgrades for the first time in five years, according to a new AM Best report.

It showed that the shift towards more downgrades was caused by the ongoing negative effects of catastrophes during 2017 and 2018 on the US property/casualty (P/C) industry.

Companies affected by the losses recorded a reduction in risk-adjusted capitalisation, volatility in operating performance and reassessments of the appropriateness of their enterprise risk management.

In contrast, positive rating actions were driven by tighter underwriting standards that led to favorable results over several years and improved risk-adjusted capitalisation, the report found.

Recognition of a company’s enhanced importance within its organization, increased parental support and merger and acquisition (M&A) activity also weighed in favour of an upgrade. included.

Downgrades of Long-Term Issuer Credit Ratings (Long-Term ICR), as a percentage of all rating actions on US P/C carriers, increased to 7.1 percent of total actions, up from 6.3 percent in the first half of 2018, while upgrades seesawed in the opposite direction with 6.2 percent of total actions, compared with 7.1 percent in the same period for the year before.

However, the ratings agency added that the “overwhelming majority” of the rating actions were affirmations (81.7 percent) “reflecting the overall stability of the US P/C industry”.

AM Best also highlighted the report’s finding that within the total number of rating changes in the first half of 2019, were the assignment of 10 P/C ratings, which accounted for 3 percent of total rating changes. Nine of the initial assigned ratings were in the commercial lines segment and involved new or recently formed companies.

The number of ratings placed under review in first-half of 2019 dropped to nine from 21 in the previous year. Although, AM Best said that the number of companies placed under review in first-half 2018 was elevated due to the implementation of the updated Best’s Credit Rating Methodology.

The commercial lines segment recorded 11 upgrades and 13 downgrades in first-half 2019, while in the personal lines segment, upgrades totaled 10 compared with 9 downgrades. And in first-half 2019, 81.3 percent of the US P/C industry’s credit ratings carried a stable outlook, a modest increase from the first half of 2018.

AM Best has a stable market segment outlook on the personal and commercial lines segments of the US P/C industry, although the industry continues to face challenges, including elevated catastrophic weather activity; rising frequency, severity and competitive issues in the automobile segment; system implementations and, in the reinsurance segment, the push for diversification and scale as M&A continues. AM Best also maintains a stable outlook on the reinsurance segment.

The Best’s Special Report was titled ‘Downgrades outpace upgrades for the first time in five years’.

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